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Why relationships with suppliers matter

Creating a welcoming environment for suppliers is often perceived as the antithesis of sound public procurement but it’s an essential part of any successful plan writes Jonathan Dutton for GOVERNMENT NEWS:

There is an oft-quoted myth within government procurement circles that “you’re not allowed to talk to suppliers,” especially during tender processes.

None of this is stated in government procurement policies, of course, and certainly not in the Commonwealth Procurement Rules (CPRs), which is the bible of Federal Government buyers that so often sets the trend for other jurisdiction’s policies.

The practice of not talking to suppliers has been built up by some public procurement officers as a buffer to their procurement policy guidelines to the extent that it has become part of the culture in some quarters.

The thinking is that it will prevent any suggestion of impropriety or bias, help defend against even the merest hint of poor probity, and generally avoid any criticism.

Yet in professional procurement, supplier relationship management (SRM) is an entirely valid supply side business strategy. It is absolutely mainstream and usually practiced by the best procurement teams on the most strategic supplier relationships. It’s a core module of the global peak body’s qualification – MCIPS (Member of the Chartered Institute of Procurement and Supply).

Indeed, in a globally remote oligopolistic market of fewer suppliers, like Australia, you might expect that SRM is the default procurement strategy – rather than tendering.

This is because good SRM can bring a wide range of business benefits to buyers. In fact, a seminal article by a PhD candidate published in the CIPS magazine CPO Agenda in 2006 concluded that a good supplier relationship typically proved more important than the written contract in managing supplier performance post contract award.

This point is endorsed by the many straw-polls I have instigated in various local procurement conferences in recent years. Buyers see that good supplier relations work.

Numerous benefits

That’s because a good business relationship helps get things done. It makes specifications work, reduces total life cycle costs, minimises risks and obviates disputes, improves compliance and helps to deliver on time and budget.

The only snag is that these benefits are difficult to measure and therefore are difficult to justify proactively. It’s hard to write them down in a business case to the CFO.

Yet, in the business world SRM needs very little justification. Good relationships make good business. Business leaders instinctively get it. A 2014 article in the Harvard Business Review by Mathew Eatough of Proxima Consultants offered four pointers for procurement leaders based on their research with over 200 CEOs:

  • being clear on how procurement can add value in an organisation to remain completely relevant

  • measuring those things, not increasingly irrelevant factors like naked savings

  • investing in both talent and capability development in their own teams

  • creating a welcoming environment for suppliers; making them feel wanted and valued through building good business relationships.

Essentially, they were recommending that buyers work out the “value of being valued” by their most important suppliers. In the pragmatic world of supplier delivery, being valued can be invaluable.

Government not exempt

Public sector procurement is not exempt from these universal business truths. The laudable desire for maximised probity should not inhibit good business practices that offer a wealth of benefit to stretched taxpayers.

Innovation the prize

In my last Government News column I discussed the increasing value of good contract management. Good SRM is the next step; it makes good contract management easier and helps facilitate the benefits.

Moreover, SRM offers the real prize of innovation because in public life a disproportionate amount of innovation can come from the supply side – if it’s encouraged and respected.

But too few suppliers feel safe offering their innovations to public departments. They fear that they will take advantage. Or as one supplier said: “…they just white-out our name and tender our designs.”

It’s true that too many firms in the private sector boycott public business. It can be just too hard. At the outset they often suspect a dutch-auction favouring incumbents. During the purchase process, the red tape and the often unreasonable terms of purchase with tricky small print can be overwhelming – and often demand large insurance premiums and time-consuming paperwork.

Ultimately, the cost of tendering in time, money and effort is high, yet the chances of winning tenders always feels low.

Panels can help

Government panel arrangements, a widespread practice where a set of suppliers are pre-qualified to supply a named set of departments, are also no panacea. Surprisingly, perhaps, they do not guarantee improved relationships.

Vendors often complain that they receive little or no business from being a panellist, that they are supposed to effectively market themselves to a captive community but with no easy way to do so and in a culture that frowns upon sales efforts.

They say there are often too many suppliers on a panel (sometimes hundreds or, in at least one state government example, thousands) and that they often serve in practice to cement the use of incumbents, a civil servant’s personal favourite or seemingly safe international brands.

It’s also the case that departments do not always follow business practices that facilitate good business with suppliers. Frequent supplier complaints of departmental behaviour include inarticulate statements of requirements, late supplier engagement, panic requests, rigid tendering processes, repetitive terms, high departmental staff turnover, master-slave mindsets and slow payment.

An instrument of policy

Meanwhile, government departments’ outsourcing is growing, meaning they increasingly rely on suppliers. And the range of outcomes governments now want from procurement as an instrument of policy is also steadily expanding.

Using procurement as an instrument of policy is on the increase but better outcomes can be facilitated through better relationships, through good SRM.

One SRM strategy that pays real dividends in capital works projects is early contractor involvement (ECI), which has been established in the private sector for some time but is relatively new to some public sector procurement.

ECI facilitates the engagement of supplier opinions early in the sourcing process. At a time when project aims can be directly influenced by expert opinion from industry specialists (the suppliers) both for the greater good as well as for all parties’ direct benefit and enhanced co-operation.

Moreover, ECI naturally eradicates some of the issues suppliers complain about when supporting government departments – such as sloppy specifications, late engagement and master-slave relationships.

Jonathan Dutton is an independent management consultant specialising on procurement and was the founding CEO of CIPS in Australia from 2004-13. He writes a regular column on procurement in government for Government News.

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